Fundermental Analysis

Fundamental analysis forecasts price movement by focusing on hard company-specific data. Corporations have miles of paper trails that review every contributing factor of a company’s strength, including product development and reception, targeted customer identifica- tion, consumption, profit outlook, management strength, and supply and demand for products.

Economic data includes income state- ments, past records of earnings, sales records, present assets, annual reports, and new product consumption rates. Fundamental analysts use this data to determine whether a stock’s current market price is overvalued or undervalued and to anticipate stock price trends and the future success or failure of the company. In its most refined state, fundamental analysis produces two ba- sic theories that affect market perception: If a stock’s fundamentals are bullish, the stock’s price should rise; if a stock’s fundamentals are bearish, the stock’s price should fall. Low prices relative to the company’s real value increase demand, which in turn drives up the price of the stock. Higher prices reduce the demand for shares, and the ensuing increase in the supply of shares leads to lower prices. This cycle feeds on itself, deftly creating market dynamics.
 Traders must also pay attention to the competition among dif- ferent companies in the same industry sector. For example, there is extreme competition among high-tech corporations where break- throughs in technology spawn dramatic market movement.

Trying to stay on the cutting edge of these markets is a full-time job. Study- ing the entire industry is vital to being able to forecast a company’s success. And that’s where the money is! Most of the information you gain from television or newspapers is fundamental analysis. Perhaps a company’s product is selling like hotcakes, or a management change is altering the direction in which a corporation is going. Perhaps a disaster occurred, triggering the selling of a corporation’s stock shares. Fundamental analysis ranges from the mundane to data that is so economically complicated it may require a degree in business to understand it. As you progress as a trader, you will learn to gauge which data is important enough to take notice of and what can be filtered out. This process is subjective; hence, there is no right or wrong. Anything that helps you to get a feel for a market is valid. It simply takes time and energy to develop a discerning ear for fundamental information, and practice to know how to apply it correctly. Visit Best Binary Options broker

A plethora of finance-related web sites offer basic fundamental information. In fact, my own web site, Optionetics (www.optionetics. com), provides easy access to stock quotes, charts, and fundamental data. Just type in the stock’s symbol on the home page and you’ll instantly find a snapshot of a company, which includes stock data and fundamental information (see Figure 2.1). A stock’s quarterly earnings growth is one of the critical pieces of information to consider when assessing its profitability. The earn- ings per share value (EPS) is calculated by dividing the net income (i.e., the profits) of the company in one quarter by the number of out- standing common shares. A comparison between the current EPS and that of the same quarter of the previous year can be used to determine earnings growth from one year to the next. In addition, analysts project a company’s earnings, and the price of the stock often reflects that projection. Since profits are an important driver of stock prices, quarterly profit reports can cause volatility in the stock price. binary options broker usa

Volatility simply means a larger than average move in the stock price. In addition, since profit reports are released quarterly, there is often speculation as to whether a company can live up to its EPS projection at the end of each quarter. If it reports earnings that fall short of expectations, the stock may fall. This is known as an earnings miss. However, if earnings are above analyst estimates, it is an earnings surprise and the stock usually moves higher. This speculation about whether a company will miss or surprise often inspires volatility in the stock—a key to finding successful options trades. Price-earnings ratio (P/E) is another important value because it compares a company’s stock price to the earnings per share. Com- puted by simply dividing a stock’s price by the annual earnings, it tells you how many times the earnings a stock is trading at. The P/E of individual stocks is then compared to the P/E for all stocks of a given industrial sector. Be aware that many new and emerging companies do not have valid P/E ratios because they are operating at a net loss and still enjoying unparalleled success when it comes to demand for shares of stock. The sales-to-price-per-share ratio is a much more accurate benchmark for evaluating emerging-growth companies. As a general rule, the faster a company’s growth rate, the higher its P/E ratio. This has given rise to another valuation technique known as the price-to-earnings growth rate formula, or PEG. The formula is straightforward; it is calculated by dividing the P/E ratio by company’s earnings growth rate. r If a high-growth company has a P/E ratio of 100 and an ex- pected annual earnings growth rate of 50 percent, the PEG ratio is 2.0 (or 100/50). r If a slow-growth company has a P/E ratio of 5 and an EPS growth rate of 7.5 percent, the company’s PEG ratio is 0.67 (5/7.5). The general rule is the lower the PEG ratio, the better the value. Hence, a stock with a high growth rate and a low P/E ratio is better than a stock with a high price-to-earnings ratio and a low earnings growth rate. In this example, the slow-growth company is better than the fast-growth company because its earnings growth rate is much better relative to its P/E ratio. Table 2.1 summarizes what to look for when looking at PEG ratios. A ratio below 0.5 is a good reason to consider bullish trades on a stock. When the reading is 1.7 or more, look out—the stock could be overvalued. Earnings, P/E ratios, and earnings growth rate formulas are not the only fundamental factors to consider when looking at individual stocks. Price-to-sales ratios, book values, dividends, and a variety of other hard data can also help traders make sense of whether a stock is under- or overvalued. For those investors interested in a more in- depth look at fundamental analysis, we encourage you to read one of my most comprehensive books (cowritten with Tom Gentile), The Stock Market Course (New York: John Wiley & Sons, 2001).